By Tal Eloss
We’ve all heard the phrase “CASHFLOW IS KING” when it comes to property. More often than not, cashflow places a significant bearing on the decision making of investors.
Project marketers and developers often use the cashflow argument to help sell their product. This draws attention away from the actual asset and seduces the purchaser with the ‘cashflow story’ that usually reads like this:
“You can own this property with very little to no out of pocket expense because of the depreciation you can claim on the property.”
In conjunction with generalised data that has been manipulated to create the ultimate sales pitch, this story usually results in investors making well-intentioned, albeit poor decisions.
The “cashflow is King” story is true to an extent, particularly with the recent changes to the ability to claim depreciation on existing dwellings, but what is not widely known or considered is this key fact:
The depreciation you claim results in an increase in capital gains tax on disposal, clawing back a significant portion of the benefit you will be able to claim.
To put this into real terms, if you have made a capital gain on a property of $100,000 and claimed or were entitled to claim $20,000 worth of building depreciation along the way, your capital gain is assessed at $120,000 before any applicable CGT discounts and you will be taxed accordingly.
This article is not intended to dissuade investors against purchasing a new property, nor is it a new property bashing exercise. However, it is important to create awareness around the full implications associated with the cashflow a new property will generate. While the cashflow will dictate affordability, the focus on any investment should be the growth potential of the underlying asset, ie: what the property will be worth in the mid to long term.
In many cases, buying brand new or off the plan properties leaves you at the mercy of the market given you are buying a property at its peak potential. The approach we take at 1Group is to assess the potential of creating gains through capital improvement or appreciation of the land content.
There is no question that properties with land content will almost always outperform apartments. This is because land within the established suburbs of our major capital cities is becoming a scarce commodity.
Although such properties usually come at a cost with respect to cashflow, when asking our clients what their motivation is for investing in property, no one ever answers: “To have a property with great cashflow.” Almost always, our clients are investing for growth.
So when making your next property purchase, look at rationalising some cashflow to increase your opportunity for growth on investment.
Get in touch for more information on any of the above.